The Canada Revenue Agency has issued two new memoranda that explain the treatment of allowances and reimbursements paid to employees, members of a partnership or volunteers of a charity or public institution, and the eligibility rules for recovering tax for persons who pay these allowances and reimbursements. These two new memoranda replace GST Memorandum 400-3-11, “Allowances and Reimbursements” dated February 1992.
GST/HST Memorandum 9.3, “Allowances” provides clarification on the meaning of an allowance and the criteria that must be met in order for an allowance to be deemed to be consumed or used by the person (employer, partnership, charity or public institution) and not the employee, partner or volunteer, and in turn, that the person is deemed to have paid the GST/HST in respect of the supply acquired by employees, partners or volunteers.
An allowance has the same meaning that it has for income tax purposes, and is defined as any periodic or similar payment that a person receives from another person without having to account for its use. For purposes of sections 174, 236, 253 and 259 of the Excise Tax Act (ETA), an amount paid as an allowance must meet all of the following criteria:
- the amount paid is a predetermined amount;
- the amount is paid for a certain purpose;
- the amount paid is at the complete discretion of the person receiving the payment; and
- there is no requirement for the person receiving the payment to repay or account for its use. The person receiving the payment does not have to demonstrate that the amount was actually spent.
In addition, certain conditions must be met under section 174 of the ETA in order for the person who pays the allowance to be deemed to have paid the GST/HST in respect of a supply acquired by employees, partners or volunteers. The conditions are as follows:
- The allowance is paid to an employee, partner or volunteer
- The allowance is paid for taxable supplies or the use of a motor vehicle
- The amount of the allowance is deductible for income tax purposes
- The travel and motor vehicle allowance is reasonable
The Appendix to the memorandum contains a chart showing the tax fraction an employer, partnership, charity or public institution may use to calculate the tax deemed paid on supplies for which an allowance is paid. For example, a person is deemed to have paid tax equal to: 5/105 for GST purposes where all or substantially all (90% or more) of the expenses are taxable supplies (other than zero-rated supplies) acquired in Canada or 12/112 (BC HST), 13/113 (NB, NL, & ON HST) or 15/115 (NS HST) for HST purposes. For HST purposes, where 90% or more of the supplies relate to an allowance made in a particular participating province, that province’s factor should be used to claim the input tax credit. If, however, 90% or more of the supplies the allowance relates to are made in two or more participating provinces, then the factor used to claim the input tax credit is the lowest factor available for the provinces where the supplies are made.
GST/HST Memorandum 9.4, “Reimbursements” explains the meaning of a reimbursement and the criteria that must be met in order for a reimbursement to be deemed to be consumed or used by the registrant and not the employee, partner or volunteer, and in turn, the eligibility rules for claiming input tax credits or public service body rebates for persons who pay reimbursements.
For purposes of section 175 of the ETA, a reimbursement is a payment made by one person to repay another person for amounts spent. Unlike an allowance, an amount paid as a reimbursement must be fully accounted for by the person receiving the payment, as evidenced by supporting vouchers or records. The CRA considers the following to be reimbursements:
- a direct payment made on account by an employer, partnership, charity or public institution as long as the liability for payment does not rest entirely with this person;
- a cash advance obtained by the employee, partner or volunteer with the company credit card; and
- an accountable advance, which is given for expenses to be incurred and to be accounted for by the production of vouchers, and the return of any amount not spent.
An employer, partnership, charity or public institution is deemed under the legislation to have paid tax where the expense was reimbursed to an employee, partner or volunteer who paid tax in respect of a property or service that was acquired or imported for use in the activities of the person. Under section 175 of the ETA, where certain conditions are met, the person is deemed to have paid the GST/HST in respect of the supply at the time the reimbursement is made. The conditions are as follows:
- the reimbursement is paid to an employee, partner or volunteer;
- the reimbursement is paid for the consumption or use in relation to activities of the employer, partnership, charity or public institution; and
- the employee, partner or volunteer has paid the tax payable.
The amount claimed as an input tax credit or rebate in respect of a reimbursement can be calculated on the deemed tax paid (actual method) or using a factor of the deemed tax paid (simplified factor method). The method of calculation selected by a registrant must be consistent within each category of expense for all employees during a fiscal year.
Organizations using the exact calculation method are required to meet the general documentary requirements in order to extract tax on qualifying reimbursements. However, registrants that choose the simplified factor method are exempt from meeting the general documentary requirements for claiming input tax credits or rebates, if they maintain books and records with the following information:
- the name and Business Number (BN) of the registrant who paid the reimbursement;
- the name of the employee, partner or volunteer who received the reimbursement;
- the total amount of the reimbursement paid to each employee, partner or volunteer;
- the total GST/HST deemed to have been paid for the reimbursement;
- the reporting period in which the reimbursement was made; and
- the nature of the supply or expense.
The memorandum also discusses CRA’s administrative policy with regards to the use of factors for calculating input tax credits and rebates on expenses charged to company credit cards and the conditions that must be satisfied to use factors.
The Appendix to the memorandum contains a chart showing the factor an employer, partnership, charity or public institution may use to calculate input tax credits or rebates for reimbursements paid to employees, partners or volunteers. For GST/HST purposes, the factors are 4/104 (subject to the 50% reduction for meals and entertainment expenses) where all or substantially all (90% or more) of the expenses are taxable (other than zero-rated) supplies; or 11/111 (BC HST), 12/112 (NB, NL, & ON HST), and 14/114 (NS HST) (subject to the 50% reduction for meals and entertainment expenses and large business recapture of input tax credits in BC & ON) where all or substantially all of the supplies for which the reimbursement is made are taxable supplies acquired in participating provinces.